New clients, a couple in their early 50s, are retiring from the police force and have to make decisions about how to structure the capital sum received from their pensions. With a decent combined income they have never adopted any savings habits.
They will continue with part-time work but have to come to terms with a different income structure.
Issues to look out for:
• The need to be mindful that while such planning may seem basic, it is far from simple for clients who have never had to undertake such planning exercises.
• Educating clients to the rationale behind each step will greatly improve their understanding and ensure their engagement in the advice process.
• More than ever, advisers need to demonstrate that they can add value and be remunerated without necessarily making a product sale.
It is not uncommon for people to live right up to their means and not make any short or medium-term savings or retirement provision. This is particularly the case when both clients have relatively secure public sector jobs, decent combined income and generous final salary occupational pension schemes.
As such, they make assumptions about their present and future financial security and, as a consequence, have not learned basic financial planning disciplines.
The first challenge was to get them to identify what their future, fixed and variable outgoings are and make sure these could securely be met, rather than concentrating on their previous level of earnings. This step is best achieved via a budget planner.
This identified an existing interest-only mortgage supported by a mortgage endowment policy due to mature in three years.
Furthermore, there were some significant commitments that would not last beyond four years in the form of school fees for their children. All other outgoings would remain reasonably consistent up to full retirement and beyond.
The target income could be considerably reduced by advising them to repay the mortgage debt and put aside a sum equivalent to the known school fees.
Consideration was given to the possibility of paying the entire school fees in advance to obtain an attractive discount, and contrast this against the potential interest earned while the capital was on deposit. The other benefit of repaying the mortgage is, of course, to remove the risk of the endowment policy underperforming.
The reduced target income could then be contrasted against the known pension incomes.
Projected state pension benefits were obtained and then gaps could be identified in relation to part-time income ceasing, state pensions commencing and ongoing monthly expenditure.
Capital could be invested with the objective of producing future income to address identified income shortfall at specific dates.
After any other anticipated capital expenditure has been earmarked, further accessible, deposit-based capital needs to be put aside as an emergency fund for unforeseen expenditure.
Protection requirements need to be factored in at this stage, considering the effect disability, illness or death may have on future plans.
Once the basic foundations and future de-risking measures have been established, the clients can invest surplus capital, confident in the knowledge that their finances are on a sound footing and having been shown the value an adviser offers is not just about making product-led investment recommendations.
Peter Chadborn is director and adviser at Plan Money